Wall Street may have been overly optimistic about what rising oil prices would do to the earnings of some of the world’s largest energy companies.
Analysts were expecting more from rebounding oil prices. As a result, earnings per share of U.S. oil and gas giants Exxon Mobil Corp. (XOM, Financial) and Chevron Corp. (CVX, Financial) fell far short of estimates. The drop in profits was blamed on falling production and challenges with chemical and refining operations.
On Friday afternoon, the disappointment was echoed by a 54-point drop (loss of 1.95%) in the S&P 500 Index. The Dow Jones Industrial Average was down more than 600 points (loss of 2.33%).
Shares of Exxon Mobil, the largest of the world’s big oil companies, fell by as much as 6% soon after the company released its quarterly report. Exxon plunged 6.05% to under $83.
California-based Chevron also lost 4.86% for $119.47 a share.
Peers, including foreign companies, were not doing any better.
The world’s second-largest oil company, Netherlands-based Royal Dutch Shell PLC (RDS.B, Financial), was down 2.12% and trading at $69.43 a share.
BP PLC (BP, Financial) was down 4.15% to $41.56 a share. Devon Energy Corp. (DVN, Financial) was down 3.41% at $40.78 a share. Imperial Oil Ltd. (IMO, Financial), which also released fourth-quarter earnings on Friday, was down 4.06% at $30.25 a share. Colombia-based Ecopetrol (EC, Financial) was down 4.78% to $18.84 a share. Phillips 66 (PSX, Financial) was down 3.65% at $97.18. Halliburton (HAL, Financial), which provides oilfield-related services, was down 3.08% to $52.83.
Missed earnings
In the fourth quarter, Dallas-based Exxon reported earnings of 88 cents on revenue of $3.7 billion. That was 2% lower compared with the prior-year quarter and below analysts’ expectations of $1.04 per share.
Chevron came out with earnings of 72 cents per share on revenues of $1.4 billion. Analysts were projecting $1.22 per share.
The amounts did not reflect impairments under the tax reform bill.
Costs for the quarter climbed significantly compared to the same period in 2016. In total costs and other deductions, Chevron reported $36 billion, up from $30.9 billion in 2016.
Costs for Exxon were $63.5 billion, up from $55.8 billion for the fourth quarter of 2016.
In the quarter, both companies distributed dividends to shareholders. Exxon dispersed $3.3 billion; Chevron, $2 billion.
Exxon Mobil
The company says it plans to invest more than $50 billion in the U.S. over the next five years. The focus will be on increasing oil production in the Permian Basin in West Texas and New Mexico and build new manufacturing sites. It also plans to create thousands of jobs, as a result.
For the year, the company said it had earnings of $4.63 per share on revenue of $19.7 billion, compared to $7.8 billion in 2016.
Cash flow from operations and asset sales, a big financial indicator in the oil business, was $8.8 billion, including proceeds associated with asset sales of $1.4 billion.
Oil-equivalent production was 4 million barrels per day, down 3% from the prior year. Excluding entitlement effects and divestments, oil-equivalent production was down 1% from the prior year.
Chevron
The company says it hopes to boost oil production by 4% to 7% in 2018.
Cash flow from operations in 2017 was $20.5 billion, compared to $12.8 billion in 2016. Excluding working capital effects, that number was $20 billion in 2017 and $13.4 billion in 2016.
The company said it spent the year trying to lower its cost structure and capital expenditures for a “cash-flow positive results.”
For the year, the San Ramon, California-based oil producer reported earnings of $4.85 per share on revenue of $9.2 billion. That was a loss of $497 million, or 27 cents per share, during the same period in 2016.
The company also reported less net oil-equivalent production in the fourth quarter.
Net oil-equivalent production of 671,000 barrels per day in fourth-quarter 2017 was down 11,000 barrels per day from a year earlier.
Brent promises
There has been a lot of pressure on the energy sector this year. Analysts expect generous profits after some of the worst years for oil since 2014.
Just five days ago, guru investor Mario Gabelli (Trades, Portfolio) went on CNBC to tell Americans it was OK to invest in oil and gas again. Gabelli said he was positioned to take advantage of a promising year of revenues and profits, highlighting the strong earnings results of companies like Halliburton.
This year, the Brent crude index reached a three-year high of almost $70 a barrel.
The U.S. Energy Information Administration says U.S. crude oil production reached its highest level in over four decades at more 10 million barrels per day in November. A report from the agency this week showed increased drilling activity as well.
Chevron CEO Mike Wirth, who replaced retiring John Watson this year, emphasized in his earnings call that just because prices have recovered, that doesn’t mean the hard work is over.
Wirth said it was dangerous to depend on the market to spark bigger returns and more cash.
“We’ve got to win in any environment,’’ Wirth said during the call.
Key to success, he said, is focusing on cost management, safety and reliability and bringing more technology into operations.
“We’ve got lots and lots of digital tech applications,’’ he said. ”I’d like to see that happen faster, see more we can do with technology to further efficiencies in our structure, productivity in our assets.”
